, Business and Finance, ICAB

1. Business & Finance
Chapter # 9
Working capital and treasury management
Q-1) What is working capital?
Q-2) What is trade-off?
Q-3) By looking of what components of working capital balance liquidity and profitability?
Q-4) Discuss types of company.
Q-5) What is cash operating cycle? [MJ10] 3
Q-6) What are the limitations of working capital performance measures?
Q-7) What are the solutions to liquidity problems?
Or how length of cash operating cycle is reduced?
Q-8) Luxury paints Ltd. has the following figures for the coming year:
Sales Taka 3,600,000
Average receivables Taka 306,000
Gross margin 25%
Inventories
Finished goods Taka 200,000
Work-in-process Taka 350,000
Raw materials Taka 150,000
Average payables Taka 130,000
Inventory levels are constant.
Raw material represents 60% of total production cost.
Calculate the length of cash operating cycle.
[MJ10] 7
Q-9) Following are opening and closing data of Apon Aloy Ltd.’s balance sheet and income
statement for the year 2009:
Calculate approximate length of cash operating cycle.
1 Jan.
Taka
31 Dec
Taka
Accounts Receivable 8,00,000 9,00,000
Accounts Payable 2,00,000 2,50,000
Credit Sales 10,000,000
Cost of Goods Sold 6,000,000
[ND10] 10
Q-10) Why hold inventory?
Q-11) What are the costs associated with holding inventory?
Q-12) What is the range of inventory control system?
Q-13) Write short notes on Perpetual inventory methods. [ND10] 2
Q-14) What is economic Order Quantity (EOQ)? [MJ10]
Q-15) Calculate EOQ from the following information:
Reagent cost Taka 100 per Litre. 2000 Ltr. are to be used per annum and holding cost per ltr.
Taka 5. Each order placed costs Taka 200 against overhead. [MJ10] 4
Q-16) What are the advantages of trade credit?
Q-17) Write short notes on Basic trade-off: cost of holding vs. cost of running out of cash. [ND10]
2
Q-18) What is the ideal level of trade receivable?
Q-19) What are the bases of credit rating?
Q-20) How financing through trade receivable?
Q-21) What are the influences on cash balances?
Q-22) What are the aims of good cash management?
Q-23) How short term finance is managed?

2. Business & Finance
Chapter # 9: Working Capital and treasury Management
Q-24) What are the actions inrespect of surplus funds?
Q-25) Write short notes on Fiduciary relationship. [ND10] 2
Q-26)
Q-1) What is working capital?
Net working capital is made up of current
assets less current liabilities.
Receivable + Inventory + Cash – Payables
Investment in working capital is needed to ‘oil
the wheels’ of business.
Q-2) What is trade-off?
It is essential to consider working capital as a
whole and how the components all fit together.
The management is concerned with liquidity
position of the company, so the main aim is to
turn the cash round as quickly as possible
whilst ensuring that profitability is not thereby
undermined: it is a trade-off.
Q-3) By looking of what components
of working capital balance
liquidity and profitability?
(i) Cash
(ii) Receivables
(iii) Inventory
(iv) Payable
Q-4) Discuss types of company.
(i) Aggressive company
(ii) Average company
(iii) Defensive company
Q-5) What is cash operating cycle?
[MJ10] 3
The cash operating cycle focuses on the length
of time between a business paying out cash for
its inputs and receiving cash for goods sold.
Q-6) What are the limitations of
working capital performance
measures?
(i) Balance sheet values at a particular
point in time, may not be typical.
(ii) Balances used for seasonal business
will not represent average levels, e.g.
Christmas tree manufacturer.
(iii) Such measures concern the past not
the future.
Therefore, measures should not be considered
in isolation. Trends and industry averages are
important.
Q-7) What are the solutions to
liquidity problems?
Or how length of cash operating
cycle is reduced?
The aims must be to reduce the length of cash
operating cycle by:
(i) Reducing inventory holding period.
(ii) Reducing production period
(iii) Reducing customer’s credit period and
tightening up of on cash collection
(iv) Extending the period of credit taken
from suppliers
Q-8) Luxury paints Ltd. has the following figures for the coming year:
Sales Taka 3,600,000
Average receivables Taka 306,000
Gross margin 25%
Inventories
Finished goods Taka 200,000
Work-in-process Taka 350,000
Raw materials Taka 150,000
Average payables Taka 130,000
Inventory levels are constant.
Raw material represents 60% of total production cost.
Calculate the length of cash operating cycle.
[MJ10] 7
By- Ujjal Das
ujjalhfc@gmail.com
2

3. Business & Finance
Chapter # 9: Working Capital and treasury Management
Q-9) Following are opening and closing data of Apon Aloy Ltd.’s balance sheet and income
statement for the year 2009:
Calculate approximate length of cash operating cycle.
1 Jan.
Taka
31 Dec
Taka
Accounts Receivable 8,00,000 9,00,000
Accounts Payable 2,00,000 2,50,000
Credit Sales 10,000,000
Cost of Goods Sold 6,000,000
[ND10] 10
Q-10) Why hold inventory?
Inventory is an idle resource costing the
business money, so there must be good resons
for holding it.
Reasons for holding inventory:
(i) To meet demand by acting as a buffer
in times of unusually high
consumption, to reduce the risk of
stockouts or where suppliers delivery
times (lead times) are uncertain.
(ii) To ensure continuity of production.
(iii) To take advantage of quantity discount
by ordering more at a time.
(iv) To buy in ahead of a shortage or ahead
of a price rise.
(v) For technical reasons such as maturing
whisky and keeping oil in pipe lines.
(vi) To reduce ordering costs by ordering
more items on fewer occasions.
(vii) Because of seasonal demand or supply.
(viii) Because suppliers insist minimum
ordering quantity.
(ix) Because special promotions are being
offered.
Q-11) What are the costs associated
with holding inventory?
(i) Purchase price.
(ii) Holding costs
- opportunity cost of capital tied up
- cost of insurance
- risk of deterioration
- cost of the warehousing function
- cost of store administration
(iii) Re-order cost
- transport costs
- clerical cost
- batch set up cost for goods
produced internally
(iv) Shortage costs
- production stoppage caused by lack
of raw material
- stockout costs for finished goods
- emergency re-order cost
Q-12) What are the inventory control
systems?
There is a wide range of inventory control
systems.
(i) Re-order level system
(ii) Periodic review system
(iii) ABC system
(iv) Economic Order Quantity System
(v) Just-in-time manufacturing system
(vi) Perpetual method
(vii) Other ways to manage inventory
Q-13) Write short notes on Perpetual
inventory methods. [ND10] 2
Q-14) What is economic Order Quantity
(EOQ)? [MJ10]
The EOQ model for inventory control
approaches mathematically problems of when
to order inventory and how much to order. The
formula is
EOQ = square Root of (2cd/h)
Where c = cost of placing one order
d = estimated usages of the inventory
items over a particular period
h = cost of holding one unit of
inventory for that period
By- Ujjal Das
ujjalhfc@gmail.com
3

4. Business & Finance
Chapter # 9: Working Capital and treasury Management
Q-15) Calculate EOQ from the following information:
Reagent cost Taka 100 per Litre. 2000 Ltr. are to be used per annum and holding cost per ltr.
Taka 5. Each order placed costs Taka 200 against overhead. [MJ10] 4
Q-16) What are the advantages of trade
credit?
(i) It is convenient and informal
(ii) It can be used by business which do
not qualify for credit from a financial
institution
(iii) It does not prevent advantage being
taken of settlement discount
(iv) Trade credit can represent virtual
subsidy or sales promotion device
offered by the seller
(v) It can be used to overcome very short
term unexpected cash flows crises
Q-17) What is the ideal level of trade
receivable?
Q-18) What are the bases of credit
rating?
(i) An assessment of ability to pay the
liabilities
(ii) An assessment of financial statement
particularly for major customer
(iii) The use of credit rating agencies, who
rate the customers according to a
number of factors related to its ability
to pay
(iv) An analysis of on going trading
experience with each customer
(v) The practice in some industries
whereby credit managers liaise to
exchange information with other
business
(vi) Credit limits on how much can be
outstanding on a customer’s account at
any time
(vii) Trade and bank references, although
these may be so bland as to be a
limited value, these references may
provide valuable corroboration of other
source of information.
Q-19) How financing through trade
receivable?
Receivables are an asset, and son can be sold
like any other assets by means of discounting
or factoring.
(i) Invoice discounting
(ii) Receivable factoring
- accounting and collection
- credit control
- finance against sale
Q-20) Write short notes on Basic trade-off:
cost of holding vs. cost of running
out of cash. [ND10] 2
Q-21) What are the influences on cash
balances?
There are a number of motives underlying how
much a business would to hold as cash:
(i) Transactions motive
(ii) Finance motive
(iii) Precautionary motive
(iv) Investment motive
Q-22) What are the aims of good cash
management?
The primary aim of cash management is to
have the right amount of cash at the right
time. This involves:
(i) Accurate cash budgeting/forecasting so
that shortfall and surplus can be
anticipated
(ii) Planning short-term finance when
necessary
(iii) Planning investment of surplus when
necessary
(iv) Cost-effective cash transmission
Q-23) How short term finance is
managed?
(i) Receivable factoring and invoice
discounting
(ii) Bank overdraft
(iii) Short-term bank loans
(iv) Operating leases
Q-24) What are the actions inrespect of
surplus funds?
By- Ujjal Das
ujjalhfc@gmail.com
4

5. Business & Finance
Chapter # 9: Working Capital and treasury Management
Surplus funds can be invested in various
financial products:
(i) Treasury bills
(ii) Deposits
(iii) Gifts
(iv) Bonds
(v) Equities
Q-25) Write short notes on Fiduciary
relationship. [ND10]
By- Ujjal Das
ujjalhfc@gmail.com
5

6. Business & Finance
Chapter # 9: Working Capital and treasury Management
Surplus funds can be invested in various
financial products:
(i) Treasury bills
(ii) Deposits
(iii) Gifts
(iv) Bonds
(v) Equities
Q-25) Write short notes on Fiduciary
relationship. [ND10]
By- Ujjal Das
ujjalhfc@gmail.com
5